Invocation of Bank Guarantee

Before discussing the procedure of invocation of Bank Guarantee, it is necessary to understand what Bank Guarantee is. Although, the term has not been specifically defined, it is a type of contract which is defined in The Indian Contract Act, 1872. As per section 126 of The Indian Contract Act, 1872, a “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. In case a bank guarantees the performance of promise or discharge of liability, of a third person (i.e. principal debtor), then the contract is popularly known as Bank Guarantee. A Bank Guarantee can be conditional or unconditional.

Now coming to invocation of Bank Guarantee, it should be invoked in the mode specified in the Bank Guarantee document. In case, no mode is specified, it is always better to submit a physical document by hand delivery to the Bank. Generally following documents are required for invocation of Bank Guarantee:

• A written demand signed by the authorized representative of a Company in whose favour the Bank Guarantee is issued.
• In case of authorized representative of a Company a certified copy of the Board resolution authorizing such a person or a Power of Attorney issued in favour of the authorized person allowing him to invoke a Bank Guarantee.
• Any other document as may be specified in the Bank Guarantee that is required for invocation.
• In case of conditional Bank Guarantee, additional documents required to justify the fulfillment of conditions would be required to be submitted to the Bank.

It is also pertinent to note some important case laws with respect to invocation of unconditional Bank Guarantees:

Stay on invocation can be granted only in case of fraud or in case of possibility of irretrievable injustice –

The Hon’ble Supreme Court has held as follows in case of U.P. Co-operative Federation Private Ltd. v/s Singh Consultants and Engineers Private Ltd. (1988 IC SSC 174):

“We are, therefore, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is, to say, in case of fraud or any case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere.”

Thus, the Bank Guarantee invocation can be stayed only in case of fraud or if the invocation of Bank Guarantee will lead to irretrievable injustice to the principal debtor (i.e. person in respect of whose default the guarantee is given).

Court cannot look into main contract when deciding on injunction of invocation of Bank Guarantee –

The Hon’ble Supreme Court have in another case, State Trading Corporation v. Jainsons Clothing Corporation, (1994 6 SCC 597), has held as follows:

“8. The grant of injunction is a discretionary power in equity jurisdiction. The contract of guarantee is a trilateral contract which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in internal or international trade or business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of the events mentioned therein the bank guarantee becomes enforceable. The subsequent disputes in the performance of the contract does not give rise to a cause nor is the court justified on that basis, to issue an injunction from enforcing the contract, i.e. bank guarantee. The parties are not left with no remedy. In the event of the dispute in the main contract ends in the party's favour, he/it is entitled to damages or other consequential reliefs.”

Therefore, as long as remedy is available for the wrong done under the main contract (i.e. the contract of which performance by a paty is guaranteed), the Courts cannot issue an injunction on invocation of Bank Guarantee.

In case of absence of original Bank Guarantee conduct the principal debtor should be considered in order to ascertain the existence

The Hon’ble Supreme Court have in another case, Punjab & Sind Bank C.S. Company & Ors., (Civil Appeal No. 4446 of 2006) has held as follows:

“8…..By the impugned order, the High Court allowed the appeal. The High Court, inter alia, held that since the originals of the Bank Guarantees were not produced by the plaintiff-bank, the plaintiff-bank cannot successfully lay its claim on the said two Bank Guarantees. The plaintiff-bank has challenged the said judgment and order in this appeal.

9. We have heard learned counsel for the parties, at some length. We have also carefully perused the written submissions filed by them. Counsel for the plaintiff-bank submitted that the High Court wrongly reversed the decree passed by the trial court because the originals of the Bank Guarantees were not produced. The High Court overlooked several mterial documents produced by the plaintiff-bank and the evidence of PW-2 and PW-3, the officials of KSEB, who have deposed about the Bank Guarantees and their invocation.

….

12. The High Court has non-suited the plaintiff-bank primarily on the ground that the plaintiff-bank has not produced originals of the Bank Guarantees and it has not adduced any secondary evidence after giving explanation as to the non-production of the originals (Roman Catholic Mission). The High Court has observed that the Bank Guarantees produced by the plaintiff-bank are not complete and, therefore, the terms and conditions thereof and rights and liabilities of the parties arising therefrom cannot be ascertained….

….

19. In this letter defendant 1 has accepted the case of the plaintiff-bank and undertaken to remit 10% of the amount of every bill from the running part payments receivable by it. Once defendant  admits execution of the Bank Guarantees and expresses its desire to repay the amount and when Counter Guarantees, number of title deeds, encumbrance certificates and confirmation letters are on record, in the facts of this case, decree must follow. In our opinion, the conduct of the defendants needs to be deprecated….”

It may be interpreted from this judgment that producing an original Bank Guarantee at the time of invocation is not required unless specified in the terms of the Bank Guarantee, especially considering that Bank Guarantee is a contract of guarantee and not a negotiable instrument.

Some of the reasons that the bank cannot give to delay the remittance of Bank Guarantee invocation proceeds are as follows (refer RBI Master Circular – Guarantees and Co-acceptances dated 1^st July, 2015):

• No delay in honouring the Bank Guarantee under the pretext that legal advice or approval of higher authorities is being obtained (Clause 2.5.1 of the RBI Master Circular).
• Where the bank is a party to the proceedings initiated by Government for enforcement of the bank guarantee and the case is decided in favour of the Government by the Court, banks cannot insist on production of certified copy of the judgement, as the judgement/ order is pronounced in open Court in presence of the parties/ their counsels and the judgement is known to the bank. (Clause 2.5.9 of the RBI Master Circular).
• In case the bank is not a party to the proceedings, a signed copy of the minutes of the order certified by the Registrar/ Deputy or Assistant Registrar of the High Court or the ordinary copy of the judgement/ order of the High Court, duly attested to be true copy by Government Counsel, should be sufficient for honouring the obligation under guarantee, unless the guarantor bank decides to file any appeal against the order of the High Court. (Clause 2.5.9 of the RBI Master Circular).
• Banks should honour the guarantees issued by them as and when they are invoked in accordance with the terms and conditions of the guarantee deeds. In case of any disputes, such honouring can be done under protest, if necessary, and the matters of dispute pursued separately. (Clause 2.5.9 of the RBI Master Circular).